For those who follow the pronouncements of central bankers and the sellside penguin brigade, one thing you might have noticed recently is an increase in the number of very “serious” people who are suddenly calling for so-called “helicopter money.”
Take Citi for instance, where both the firm’s chief economist Willem Buiter and global head of G10 currency strategy Steven Englander both called for helicopter money in September as apparently, the only way to save the world now is to simply have the government print debt certificates only for the central bank to immediately monetize them.
Note the enormity of that suggestion: that is just one degree of separation away from suggesting that central banks literally drop cash from the sky.
("Yes, more of that!!")
On Wednesday, we bring you the latest “helicopter” analysis courtesy of SocGen who apparently fears that the only way to avoid secular stagnation (which, for the uninitiated, is just another complicated-sounding, economist buzzword for the more colloquial “everything grinds to a halt”) is for central bankers to call in the Krugman Kraken and go full-Keynes.
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Hard landing – the long view
The long-term view for case 3 (hard landing / reform) essentially reflects a return to more normal market conditions. Reforms support a quick clean up of the balance sheets and a recovery in productivity, which pushes real yields up. Fears of deflation subside, and that too contributes to a normalisation of bond markets. Yields rise: the secular bond rally is over. There is little value is discussing that here. Instead, we focus on the most extreme scenario (case 4), that sees prolonged economic pain (hard landing, lost decade).
In case 4, the medium- to long-term bond view depends greatly on the policy response, especially in G4. Of course, government debt has risen sharply since the financial crisis; hence there is much less room for fiscal stimulus. Economies where public debt as a percentage of GDP is relatively low, and more generally where levels of non-financial debt is contained (Graph 8), are expected to offer better resilience, and this is generally expected to be reflected in the relative performance of sovereign bond markets. In a hard landing scenario with durable global economic pain, investors tend to focus on the balance sheet risks. Japan has been an exception, i.e. has remained a safe haven despite its enormous government and more generally non-financial debt load (Graph 7). This is, to a large extent, thanks to its exceptionally large and positive Net International Investment Position (NIIP), which tends to support repatriation in crisis time.
Generally, the public debt sustainability issue means that one cannot count on fiscal policy to fix the problem. Market discipline indeed limits the potential for proactive fiscal easing. We see four potential policy directions and they all imply very distinctive scenarios for bonds:
1. Monetary financing. There isn’t much fiscal room, unless central banks accept to finance it. That isn’t possible everywhere, e.g. it is forbidden in the eurozone. In areas where it is possible, central banks might accept to fund new government spending or tax cuts. The US already has had recourse to such a powerful policy mix response, which partly explains its strong economic outperformance, e.g. relative to Europe, since the great recession (a quicker clean-up of the banks also helped).
2. Qualitative easing. Central banks print money, but choose to buy private assets. It remains to be seen whether the transmission mechanism, through the portfolio and credit channels, will be working. By buying private equity and bonds, the central banks facilitate the funding of private entities, but this isn’t necessarily a trigger for them to invest and spend
3. The helicopter. Rather than buying assets, central banks drop money on the street. Or even better, in a more modern and civilised fashion, credit our bank accounts! That, after all, may be more effective than buying assets, and would not imply the same transfer of wealth as previous or current forms of QE. Indeed, ‘helicopter money’ can be seen as permanent QE, where the central bank commits to making the increase in the monetary base permanent. Again, crediting accounts does not guarantee that money will be spent – in contrast to monetary financing where the newly created cash can be used for fiscal spending. And in many cases, such policy would actually imply fiscal policy, as most central banks cannot conduct helicopter money operations on their own.
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So again, the thing to realize here is that this has moved well beyond the theoretical and it's not entirely clear that most people understand how completely absurd this has become (and this isn't necessarily a specific critique of SocGen by the way, it's just an honest look at what's going on). At the risk of violating every semblance of capital market analysis decorum, allow us to just say that this is pure, unadulterated insanity. There's not even any humor in it anymore.
You cannot simply print a piece of paper, sell it to yourself, and then use the virtual pieces of paper you just printed to buy your piece of paper to stimulate the economy. There's no credibility in that whatsoever, and we don't mean that in the somewhat academic language that everyone is now employing on the way to criticizing the Fed, the ECB, and the BoJ.
There's no sense to the helicopter thesis at all. That is, if the answer to slumping global growth and trade was as simple as me printing one paper liability and funding it with another liability that I also print, then everyone's problems would have been solved a long time ago. In the simplest possible terms: if I can just print paper money and hand it to you and solve not only mine, but your problems, then there are no problems.
Here's a message to central banks: outright deficit financing is beyond "erroneous" - it simply doesn't make any sense at all. Even if someone believes in the value of the paper you print, you can't just generate one kind of paper on one printer (i.e. Treasurys) and then use the other kind of paper you print (i.e. currency) to buy it and then shower the proceeds on the clueless masses. That's a monetary charade that not even the American public will buy for long.
Put simply, "there were times ... when I was doing Krugman that I actually felt like Krugman, like really Krugman..."